JGBs fall as market awaits BOJ meeting on Tuesday

Dominic Lau

Monday, 29 Oct 2012 | 6:34 AM ETReuters

SHARES

* BOJ expected to expand asset-purchase programme on Tues

* 10-year JGB futures dip but hold above 20-day moving average

TOKYO, Oct 29 (Reuters) - Japanese government bonds fell on Monday after the previous session's rise and ahead of Tuesday's Bank of Japan meeting, with the market expecting the central bank to further ease monetary policy.

The 10-year yield inched 1 basis point higher to 0.770 p ercent, while the 10-year JGB futures eased two ticks to 144.22 in light volume, but held above their 20-day moving average at 144.16.

The five-year yield was unchanged at 0.185 percent, supported by strong expectations that the BOJ would expand the size of its asset-buying programme by 10 trillion yen ($125.7 billion) on Tuesday.

The central bank now buys bonds with up to three years left to maturity in its asset-purchase programme, hence supporting shorter-date notes.

Nevertheless, the BOJ expectations have been well flagged in the market.

``The U.S. Treasury market rose sharply last Friday. Still, the JGB market is still range-bound. Basically, market participants are waiting for the BOJ decision tomorrow and the nonfarm payrolls this Friday,'' said Tomohisa Fujiki, interest rate strategist at BNP Paribas.

Finance Minister Koriki Jojima, piling pressure on the central bank, said on Monday that he wants the BOJ to take bold policy steps while closely working with government to beat deflation.

A weekly gauge of sentiment in the Japanese government bond market turned lower but remained in positive territory for a second straight week, with most respondents expecting benchmark yields to stay in their recent range, a Thomson Reuters survey showed.

Yields on the 30-year bonds rose 2 basis points to 1.950 percent, giving up Friday's fall, while those on the 20-year debt put on 1 basis point to 1.680 percent.

Primary dealers in Japanese government bonds warned the finance ministry on Friday of the growing risk of a ratings downgrade over a political standoff that could cause the government to run out of money next month.

Japan is seven months into the current fiscal year, but legislation needed to sell bonds to fund this fiscal year's budget is stuck in limbo due to political bickering.

``Most of the market participants think the special deficit bill will be passed by the Diet. The current issuance programme will go on. This is still the central scenario in the market, not affecting the market today,'' BNP Paribas's Fujiki said.

Tadashi Matsukawa, head of Japan fixed income at asset manager PineBridge Investments, said market participants were also cautious ahead of the U.S. presidential election on Nov. 6.

``If (President Barack) Obama wins, we are probably going to see lower yield because the fiscal cliff is going to be an issue,'' he said.

If Republican candidate Mitt Romney wins, ``then we will have risk-on rally in equities and commodities, and bonds will sell off at least for a short period of time. It will be negative for the JGBs,'' Matsukawa said. ``The outcome of the presidential election will be important for the JGB market.''